- The S&P 500 surged back above 4700 despite the Fed signalling that it expects to hike three times in 2022.
- Stocks enjoyed a “sell the rumour, buy the fact” reaction to the policy announcement and the Fed’s bullish 2022 outlook.
- Some said with the last major US risk event of the year concluded the “Santa rally” could start.
US equities rallied in wake of the latest Fed policy announcement and post-meeting press conference with Fed Chair Jerome Powell. The S&P 500 gained more than 1.6% to close back above 4700, only a whisker away from record closing levels. Meanwhile, the Nasdaq 100 index was up more than 2.0% and pushed easily back above the 16K level to near 16.3K, while the Dow gained over 1.0% and nearly recovered back to the 36K level. The VIX dropped nearly three points to just above 19.0.
On balance, Wednesday’s Fed meeting was a hawkish affair. While the bank left rates unchanged at 0.0-0.25%, it doubled the pace of QE taper in January to $30B per month as expected and its dot-plot showed that the median expectation amongst Fed policymakers is for three rate hikes in 2022. This was at the hawkish end of expectations (some had expected the dot-plot to indicate two hikes next year). In the press conference, Powell talked about how the economy was very strong and how rate hikes would be appropriate to maintain price stability, which would prolong the expansion and ensure a more durable return to pre-pandemic labour market conditions.
Despite the Fed’s hawkishness, stocks rallied, with the driver of this rally unclear. Some cited a sell the rumour, buy the fact reaction. That is to say, traders were positioning themselves cautiously in the run-up to the Fed meeting and, once the risk event was out of the way (even though it was a tad more hawkish than anticipated), markets got the green light to rally. Some said that, with the final major US risk event now out of the way for 2021, the typical December “Santa rally” can properly kick into gear.
Another factor that could have been bullish for markets was the Fed maintaining its stance that, despite the risks posed by Omicron, the Fed remains very bullish on the US economy for 2021 (instilling confidence in forecasts for earnings growth). Meanwhile, Powell noted how if growth did slow, the pace of rate hikes could also be slowed as the Fed responds to changing economic conditions. That was a comforting message to investors, some of whom have become fearful that the Fed would not be there to support a weakening economy if inflation remained elevated.
Note: All information on this page is subject to change. The use of this website constitutes acceptance of our user agreement. Please read our privacy policy and legal disclaimer. Opinions expressed at FXstreet.com are those of the individual authors and do not necessarily represent the opinion of FXstreet.com or its management. Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
Recommended content
Editors’ Picks
EUR/USD edges lower toward 1.0700 post-US PCE
EUR/USD stays under modest bearish pressure but manages to hold above 1.0700 in the American session on Friday. The US Dollar (USD) gathers strength against its rivals after the stronger-than-forecast PCE inflation data, not allowing the pair to gain traction.
GBP/USD retreats to 1.2500 on renewed USD strength
GBP/USD lost its traction and turned negative on the day near 1.2500. Following the stronger-than-expected PCE inflation readings from the US, the USD stays resilient and makes it difficult for the pair to gather recovery momentum.
Gold struggles to hold above $2,350 following US inflation
Gold turned south and declined toward $2,340, erasing a large portion of its daily gains, as the USD benefited from PCE inflation data. The benchmark 10-year US yield, however, stays in negative territory and helps XAU/USD limit its losses.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
Week ahead – Hawkish risk as Fed and NFP on tap, Eurozone data eyed too
Fed meets on Wednesday as US inflation stays elevated. Will Friday’s jobs report bring relief or more angst for the markets? Eurozone flash GDP and CPI numbers in focus for the Euro.